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Energy Tax Cuts Could Hurt EU Consumers, Gentiloni Warns

By Kevin Pinner · Apr 26, 2022, 5:58 PM EDT ·

Most European Union states cut value-added or excise taxes on energy as Russia's invasion of Ukraine set already-soaring prices ablaze, but these politically expedient solutions may hit consumers hardest, Paolo Gentiloni, the bloc's top tax official, told finance ministers.

Gentiloni, the European Union's economic commissioner, warned EU finance ministers in a letter dated Monday that policymakers likely cut energy tax rates to quickly lower costs without fully appreciating who benefits in the long run. Gentiloni advised states to support vulnerable households and businesses by redistributing higher revenue from energy taxes, or energy companies' unusually abundant profits, saying those options could have less negative spillovers.

"Lowering taxation on energy is easy to implement, and this is probably the reason why taxation measures have been used extensively in the first weeks and months of the crisis," Gentiloni told EU finance ministers in the letter.

However, these measures could prove counterproductive in the long term, especially if higher energy prices persist, he said. Gentiloni urged consistency with the bloc's overarching goals of achieving energy autonomy by 2030, net-zero greenhouse gas emissions by 2050 and equity among taxpayers.

"Reductions in VAT rates, in particular, have a bad track record in translating into lower prices for consumers as tax cuts may be compensated by increased tariffs from energy suppliers," Gentiloni said.

On April 6, a new VAT system took effect across the EU, allowing member states more flexibility to set rates domestically. In October, the bloc gave member states a "toolbox" of policy options to address rising energy costs, he said.

Companies outside the energy sector "could even be worse off" from the tax cuts, according to Gentiloni. Since many businesses can already deduct VAT based on EU law, they won't benefit directly from reduced rates, he said. Furthermore, companies could hike prices in response, once again hitting consumers.

"Recycling higher revenue from energy taxes or from abnormal profits of energy companies can help financing targeted support to vulnerable households and businesses or to specific categories of transport users in a fairer and more sustainable way," Gentiloni said.

Governments could redistribute energy companies' profits through checks or tax refunds, depending on national preferences, while remembering higher energy prices hurt lower-income households the most, he said. Gentiloni said that if higher prices persist, windfall taxes on energy companies could be more effective at lowering costs for consumers compared with cutting tax rates.

In February, the EU's executive branch said it was considering windfall taxes on energy companies' profits during the war in Ukraine. In March, the Organization for Economic Cooperation and Development endorsed windfall taxes on energy companies in a report about the global economy.

On Wednesday, Gentiloni is due to meet with Andrea Peruzy, the chairman of Gestore dei Mercati Energetici, Italy's spot exchange for electricity and natural gas, along with Roberto Gualtieri, mayor of Rome, according to his published schedule.

For the EU to achieve its objectives on climate change and energy independence, tax relief measures on fossil fuels must be "temporary and targeted at improving affordability of energy products for businesses and households while prices are high," he said.

An EU official told Law360 Gentiloni's letter should serve as guidance to member states regarding energy taxation. 

"Coordinated EU responses are essential to safeguard the single market," the official said. "We are in close contact with all member states."

The official confirmed Gentiloni's meeting Wednesday afternoon with Peruzy.

--Editing by Neil Cohen.

Update: This story has been updated with comment from an EU official.

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